I pushed for a naval blockade back in March on the rationale that Iran - much like Russia - is a gas station masquerading as a country. Oil exports and the revenue they generate power the rest of the economy, so these places implode if you disrupt their one-trick-pony business model. We’re getting a live test of this theory now. The US reimposed its blockade on July 14 and has made this iteration more onerous than the first one, including by doing things I recommended ahead of its reinstatement.

The best summary statistic for Iran’s economy is its currency - the Rial - and this has gone into freefall since July 14. On an annualized basis, the Rial is down 110 percent versus the Dollar since July 14, which is way above its normal pace of depreciation in recent years. In my opinion, the popular narrative on Iran is wrong. The US has time on its side. Iran doesn’t. Its economy is imploding - the Rial in freefall is an indication of this - and control over the Strait of Hormuz is slipping away. The US is on the right path. It just has to be patient and let things play out.

The chart above shows daily data for the exchange rate of the Iranian Rial versus the Dollar starting in 2022. The two vertical red lines denote the initial imposition of the blockade on April 13, 2026, and its reimposition on July 14, 2026. Every imposition of the blockade is followed by a sharp depreciation of the Rial versus the Dollar, which is a sign Iran’s export revenues are collapsing and preventing it from importing the stuff it needs for its economy to function. It’s hard to get a sense of the scale of this, so the chart below compares the annual fall in the Rial in recent years with its annualized fall since the reimposition of the blockade. On an annualized basis, the Rial is down 110 percent since July 14. That’s a full-blown currency crisis and it’s impossible to run a functioning economy - let alone fight a war - when you’re in such a crisis. Iran is running out of time.

Pretty much every media outlet I track has in recent days had a lead story on the sell-off in global bond markets. That’s creating the mistaken impression that what’s going on is new and that - because there’s relentless coverage of the Treasury market since the surprise buyback announcement two weeks ago - this is unique to the US.

Neither is true. This sell-off has been going on in fits and starts since 2022 and - with the exception of low-debt safe havens like Switzerland or Sweden - it’s engulfed pretty much every advanced economy. The slew of recent press coverage also makes it seem like we’re heading for an imminent cataclysm. That won’t happen. Governments - as the recent Treasury buybacks show - are doing everything they can to slow the rise in yields. This will be a slow burn that - every once in a while - heats up for a few weeks.

Shorting government bonds thus isn’t a no-brainer. A better way to trade this is in currency space - the crazy fall in the Yen over the past two years testifies to that - and of course there’s precious metals as part of the “debasement trade.” If governments are intent on artificially capping yields - and every indication is that this is where we’re headed - shorting the Dollar and being long the Swedish Krona as well as precious metals are better ways to trade this in my opinion.

The panel of charts above show the 2-year government bond yield (black line), the 10-year yield (blue line), the 10y10y forward yield (orange line) and the 10y20y forward yield (red line) for the US (top left), Germany (top middle), Japan (top right), the UK (bottom left), Italy (bottom middle) and France (bottom right). I’ll use these charts to draw out key stylized facts about the rise in longer-term government bond yields.

• We’re in the fifth year of this sell-off. This sell-off began in 2022 and it’s shape-shifted a number of times since then. When long-term yields first started rising in 2022, this was all about central banks hiking rates, so the 2-year yield was pushing up 10-year, 10y10y forward and 10y20y forward yields. This changed in the course of 2024 when 2-year yield started falling in most places, but long-term yields kept rising. Markets were pushing up risk and term premia at the long end of G10 yield curves. Finally, the most recent rise in long-term yields is again due to front-end yields. This is due to the hawkish keynote by Warsh at Jackson Hole, which - as I laid out in a recent post and live stream - was an attempt to stop long-term yields from rising. The bottom line is that nothing that’s happening now is new. This is the continuation of a medium-term trend that’ll keep going for many years.

• This sell-off is completely global. When all this began in 2022, central banks around the world were hiking in unison, so there was obviously an underlying global driver. That’s no longer true now, but the rise in longer-term yields is still global. There’s two reasons for that. During COVID, every advanced economy did massive fiscal stimulus, so - if long end risk premia are rising - this should be true everywhere. In addition, budget deficits all over the place remain far wider than in the decade before COVID. Fiscal policy has gotten unmoored on a global level and so it makes sense that long-term yields are trending higher everywhere.

• Governments everywhere are fighting this. The ECB holds the crown in this regard, seeing as it intervened aggressively in 2022 to cap Italian and Spanish yields and introduced a new tool to normalize this kind of thing going forward (TPI). The BoJ continues to buy large amounts of government bonds on a gross basis and then there’s the recent buyback announcement from the US Treasury. All this boils down to artificial yield caps in some form or other. Governments everywhere are trying to slow the rise in yields, which means the “shadow yield,” i.e. where yields would be without government interference, is quite a bit higher than observed yields in most countries. This sell-off therefore has many years to go before observed yields will be allowed to catch up with their shadow yields.

• Inflation break-evens are fast asleep everywhere. Nowhere in the G10 are markets pricing a pick-up in inflation, which means the rise at the long end of the curve is all about real yields. That’s a puzzle because all this is obviously headed for governments inflating away unsustainable debt burdens. However, it’s a reality that break-evens have a terrible track record at predicting the future, especially at long horizons. So I take little comfort from the fact that break-evens remain low.

The fact that this shock is global and has been ongoing for many years underscores the futility of policy makers’ recent actions. What hope do Treasury buybacks have in the face of a multiyear trend that’s still got many years to play out? What hope is there for Japan’s FX interventions when the gap between observed and shadow yields is so massive? The only thing that’s certain is that governments will keep fighting the rise in yields, which means currencies and precious metals are where the trades will be.

It’s my view that containing the rise in long-term Treasury yields is the singular focus of US policy at the moment. That’s the reason for the surprise buyback announcement by the Treasury and also explains why Warsh pivoted to be hawkish on inflation in his Jackson Hole keynote. His more dovish performance at the last Fed meeting on July 29 sparked a steepening of the yield curve and the US couldn’t possibly afford a repeat of that. In my opinion, there’s a new Treasury-Fed accord taking shape, where the main goal is to keep longer-term yields contained in the face of out-of-control deficits.

I get a lot of pushback for my view, so today’s post shows that the underlying dynamic in the Treasury market is worse than meets the eye. That’s because US data have been surprising pretty consistently on the downside for the past month, which - historically - would have pulled longer-term yields down. However, that hasn’t happened, which is a sign how much upward pressure on long-term yields there really is. As far as I can tell, it’s an all-hands-on-deck situation where long-term yields are concerned.

The blue line in the chart above is my weighted average of all major US data surprises relative to Bloomberg consensus, where I set the weights based on the importance of each data release for predicting GDP growth. This series has fallen quite sharply over the past month and is now firmly in negative territory, with the weighted average data surprise over the past 60 trading days around -0.5 standard deviations. This is due to things like weak payrolls for July on August 7th (a -1.4 standard deviation surprise), weak retail sales for July on August 18th (a -1.9 standard deviation surprise) and a very weak Chicago PMI for August that came out on Friday minutes before the Jackson Hole keynote (a -2.5 standard deviation surprise). Weak data should weigh on 10-year yield as markets revise their expectations down for inflation and growth, but the opposite has been true. 10-year yield is up, even as data surprises have been negative. That’s a sign that demand for Treasury debt is weaker than first meets the eye.

The chart above shows a rolling 30-day correlation of data surprises and the daily change in the 10-year Treasury yield. This thing is obviously noisy, but - on average - the correlation is positive and around 0.3, which means that positive data surprises push yields up and negative data surprises pull them down. The last data point is for the 30-day window through yesterday and shows that this correlation has gone very slightly negative. That indicates that yields have decoupled from data and the obvious explanation for this is that markets are more focused on the trajectory of the deficit, so they’re pushing up longer-term yields regardless of what data surprises are doing. The underlying dynamic in the Treasury market is more worrying than you think.

The exorbitant privilege is the US’ ability to issue lots of debt at low yields while also enjoying a strong Dollar. You’d think this privilege would be eroding under the weight of endless policy noise and volatility. After all, it’s only a year ago markets were having a big debate on whether the US is losing reserve currency status. Surprise buybacks by the US Treasury are more recent evidence that all’s not well when it comes to funding the debt behemoth that we’re becoming. But - when you look at the US relative to its G10 peers - there’s no sign whatsoever that markets are penalizing the US for any of this. The exorbitant privilege has certainly eroded from a decade ago, but that’s been a longer-term trend that predates the past few years.

I calculate the differential of the 10-year US Treasury yield minus the trade-weighted average 10-year yield on government bonds in Germany (DE), Japan (JP), the UK (GB), Canada (CA), Switzerland (CH), Sweden (SE) and Australia (AU), where I use 10-year currency forwards to hedge the returns on these government bonds back into Dollars. This rate differential is therefore purely in Dollar terms and thus a good proxy for the “convenience yield,” i.e. whether global markets are willing to buy US debt at a lower yields than debt from other countries because Treasuries are “special.”

The chart above shows a daily time series for this 10-year Dollar differential, starting in January 2010 and going through August 2026. It’s clear that the “convenience yield” on US government debt has disappeared. Where it used to be that the 10-year yield was on average around ten basis points below Dollar-denominated yields in the rest of the G10, there’s now a ten basis point premium. The exorbitant privilege has gone up in smoke, presumably due to US debt rising faster than in the rest of the G10.

At the same time, there’s no sign the policy noise of recent years has caused markets to demand a higher risk premium. If anything, the opposite is true. The risk premium markets demand now is lower than during the Biden years. There’s two explanations I can think of why this might be. First, the fiscal picture outside of the US is worsening as well, notably in Japan and parts of Europe. As the differential is a relative measure, this might make the US look better on a relative basis even if things are getting worse in absolute terms. Second, the US is leaning on markets to cap longer-term yields. In fact, it’s this effort that in my view explains the hawkish keynote by Kevin Warsh at Jackson Hole, as opposed to any genuine desire to hike. A new Treasury-Fed accord is taking shape, with the overriding objective of keeping long-term yields anchored as debt and deficits run out of control. It’s possible this is pulling down my differential, in which case this is yet another manifestation of actual yields decoupling from “shadow yields,” i.e. what yields would be without government interference.

The fact that markets don’t price a meaningful fiscal risk premium really worries me. After all, if markets don’t send such a signal, policy makers have no incentive to make needed changes. Things will have to get worse before they can get better.

Kevin Warsh gave a hawkish keynote at Jackson Hole on Friday and markets moved quickly to raise the likelihood of a 25 basis point hike in September. In normal times, this would be bad for gold and the debasement trade, but we’re no longer in normal times. Today’s post explains why Friday’s “hawkish” shift from Warsh is actually good for gold and other precious metals, which means they should reverse Friday’s sell-off in relatively short order. The big picture is highly supportive of the debasement trade.

When it comes to US policy these days, the tail wags the dog, by which I mean that much of what the government does is driven by the need to fund the massive deficit at affordable interest rates. This is why Warsh had to sound hawkish on Friday. A repeat of his dovish performance on July 29 would have risked re-igniting the bond market sell-off that’s plagued the government ever since and forced the Treasury to announce highly unusual buybacks to get things back under control. The Treasury and the Fed have joined forces to keep long-term yields from spiraling out of control, which is what I called a new Treasury-Fed accord in yesterday’s post and live stream.

Now think about what all this means for the debasement trade. The reason to hike is to tighten financial conditions and slow domestic demand. Financial conditions are most obviously a function of the 10-year Treasury yield, which is disproportionately important as it drives mortgage rates and thus the housing market. A September hike - if it comes to pass - will happen to anchor the 10-year yield and avoid a repeat of the bond market sell-off after July 29. Its purpose will therefore be the opposite of what a traditional hike aims to do and is why the debasement trade will continue to do well. A September hike, if that’s where we end up, will be performative, with the principal aim of keeping financial conditions loose.

What does all this mean for gold? The black line in the chart above is the monthly average for the price of gold starting in January 2000. The blue line is the real 10-year Treasury yield, which is shown on the right axis on an inverted scale. If this line falls, it means real rates are rising. Since this is the opportunity cost of holding gold, that’s bad for gold prices and you can see this broadly holds over time. A rise in the real 10-year yield tends to see gold prices fall.

If I’m right that we’re witnessing the emergence of a new Treasury-Fed accord, the purpose of which is to cap longer-term yields, that’s bullish for gold because it caps the upside for real interest rates. In fact, it’s even more than that. A few weeks ago, I did a series of posts about “shadow yields,” which is where yields would be without all the government intervention that happens across much of the G10. The more shadow yields rise as US debt keeps growing, de facto yield caps will just fan the flames of the debasement trade. So Friday’s hawkish speech by Kevin Warsh isn’t a bearish signal for gold and a Fed hike in September won’t be such a signal either. Out-of-control debt is driving everything these days and it’ll drive gold higher.

There’s two ways of thinking about yesterday’s keynote by Kevin Warsh at the Jackson Hole Symposium. The first is to see it as a standard monetary policy pivot. After being dovish on inflation on July 29 - the most recent Fed meeting - Warsh has now decided that inflation isn’t coming down fast enough, so a more hawkish tone is needed. The second is to see yesterday in the bigger picture, which is that his performance on July 29 sparked a sharp rise in long-term yields, which the US Treasury was forced to tamp down with a highly unusual buyback announcement. That announcement fanned the flames of the “debasement trade” on fears the US is moving in the direction of artificial yield caps, i.e. it had a lot of unintended and potentially negative consequences. So it’s probably fair to say US policy makers aren’t itching for a repeat of all that.

In my opinion, yesterday’s “hawkish” keynote was all about containing the rise in long-term yields, which is what I outlined in my preview for Jackson Hole. If that’s correct, markets are misreading what’s going on. They’re pricing greater odds for hikes in the upcoming Fed meetings, when that’s not what this was about. Instead, this was about anchoring the long end of the yield curve, i.e. this was a further step in the direction of managing the long end of the yield curve. This also means - if my interpretation is correct - that yesterday will prove to be another positive catalyst for the “debasement trade” and a weaker Dollar over the medium term. We’re seeing the emergence of a new Treasury-Fed accord where the overriding goal is to keep borrowing costs down.

The chart above shows the slope of the US yield curve. It plots the difference between the yield on 30- and 2-year Treasuries. The vertical red lines denote key turning points so far this year, starting with the beginning of the war in the night of Feb. 27, the start of the US blockade of Iran on Apr. 13, the memorandum of understanding with Iran that was signed on Jun. 17 and the most recent Fed meeting on Jul. 29. A repeat of the Jul. 29 performance could have de-anchored long yields and undone all of Treasury’s efforts to contain them. There was little alternative but to sound hawkish therefore and - as the chart shows - this worked. The slope is almost back to pre-July 29 levels.

If I’m right about this, markets once again have the wrong end of the stick on upcoming Fed meetings. As the gray line in the cart above shows, they now price a 60 percent probability of a 25 basis point hike in September, up from 40 percent prior to the speech. Markets are heading back to pricing two full hikes through the end of the years as the blue line shows. I don’t think yesterday signaled any of that. This was just a recalibration in tone to avoid a repeat of the long-end sell-off that’s plagued the US since Jul. 29. If I’m right about this, yesterday is a positive medium-term catalyst for the debasement trade and a weaker Dollar. As the chart below shows, gold pulled back yesterday - a risk I’d flagged in my preview - but this is just noise. The pieces are falling into place for gold and other precious metals to go much higher.

Kevin Warsh gives his first keynote at the Jackson Hole Economic Policy Symposium in a few hours. After what’s widely seen as a rough start to his chairmanship - some of which is unfair in my opinion - two things are pretty clear. First, expectations are very high for today. Warsh stands accused of not having shed any light on where he stands on the economy and - more importantly - why the Fed didn’t hike on July 29. The fact that expectations are high is unfortunate because the speech will almost certainly fall short of all the stuff people want to hear. Second, the reason the speech will fall short is because Warsh has painted himself into a corner. He can’t talk about where policy is headed because that’s forward guidance and he’s trying to - rightly - ditch that. He can’t dwell on why the Fed didn’t hike at the last meeting because that’ll sound dovish and risk sparking another Fed “credibility” crisis, with markets pushing long yields up in a replay of what happened after July 29. Finally, he can’t say anything substantive about more medium-term, structural issues, because they’re up to his task forces and he can’t front-run those. So my best guess is that he says nothing, covering that with a veneer of hawkishness made up of thunderous proclamations that price stability is all-important and that the Fed has dropped the ball on this. The risk is therefore that risk markets and - especially - precious metals pull back because they’ll think he’s being hawkish, when really he’s saying nothing because that’s all he can say.

The worst possible outcome for Warsh is that he comes off as dovish. That’s because markets will immediately jump on the “credibility crisis” bandwagon and drive longer-term yields up. That would be a replay of what happened after the Fed meeting on July 29 and after then Chair Powell’s dovish keynote at Jackson Hole a year ago. The chart above shows the slope of the US yield curve - specifically the 30- versus 2-year yield - and how this spiked on both occasions. A resumption of curve steepening would be especially unwelcome given recent efforts by Treasury Secretary Bessent to cap long-term yields. Markets are uniquely focused on the risk that out-of-control fiscal policy ultimately ends in debt monetization, so it’s better to play it safe and sound hawkish.

Which brings me to the debasement trade. The chart above shows the gold price since Jan. 2024. Last year’s Jackson Hole keynote and the most recent Fed meeting sent gold soaring because both were seen as dovish. If there’s now a hawkish-sounding keynote - even if it really says nothing at all - risks are that gold and other precious metals pull back. Such a pullback would be temporary as the underlying driver of the debasement trade - out-of-control fiscal policy - is only likely to get worse before it gets better. So I’m flagging this as a short-term risk. The debasement trade is only just getting going in the grand scheme of things.

Long-term government bond yields have been rising for several years across much of the G10. This rise is unnerving governments because debt levels are up substantially from a decade ago, so even a small rise can mean a much higher interest bill. Indeed, the US Treasury last week surprised markets with larger-than-expected buybacks of long-dated debt, a move seen by many (including me) as an attempt to artificially cap yields. As a result, the Dollar fell sharply and the debasement trade took off. Markets know exactly what game is being played and are hedging what’s seen as growing risk of debt monetization by buying safe haven assets.

There’s competing theories on why long-term yields are rising. One theory is that it’s the AI buildout that’s driving this, given that lots of companies are chasing a limited pool of financing. This view is popular in Washington, DC, because it distracts from the other theory, which is that it’s the massive budget deficit that’s driving up longer-term yields. Today’s post evaluates these competing theories based on data for the US saving-investment balance. Those data point overwhelmingly to the budget deficit - not the AI buildout - as the reason for rising yields.

The chart above shows quarterly data for the US saving-investment balance going back to 1990. This is an identity that apportions the current account balance (black line) into net saving in various sectors of the economy. Households (pink bars) tend to be net savers, i.e. providers of capital, as is the financial sector (orange bars) and non-financial corporates (blue bars). The government (red bars) tends to be a net borrower, i.e. absorbs net saving from the rest of the economy via its debt issuance.

The last time we had a lot of excitement about technological innovation and higher productivity growth was in the “IT bubble” of the early 2000s, which saw non-financial corporates flip from being net savers to borrowers, i.e. the capex buildout at the time was very large and - for a few years - accounted for the entire current account deficit. Nothing like that’s happening now. It’s government dissaving, i.e. the budget deficit, that’s eating up resources, while the non-financial corporate sector stayed a net saver in data through the first quarter of this year. The bottom line is that the AI buildout isn’t why government bond yields are rising. It’s good, old-fashioned crowding out and out-of-control fiscal policy that’s driving up yields.

Media coverage of US sanctions on Iran - and the naval blockade - is unrelentingly negative. The standard narrative goes that we’ve already sanctioned Iran massively, so what good will a few additional measures do. This is nonsense. After Russia’s invasion of Ukraine, I learned that the mainstream media bashes economic warfare no matter what. I’d love to believe that happens out of conviction - even if it’s ill-informed - but the reality is that much of this is lobbying on behalf of Western businesses who see sanctions as interfering with their ability to make money. What gets dressed up as journalism is really just spouting what powerful commercial interests - like Greece’s shipping oligarchs and Germany’s exporters - want people to hear. After all, if you’re doing rampant sanctions evasion, it helps if everyone thinks sanctions don’t work in the first place. Then you’re not doing anything wrong.

I’m a proponent of sanctions and pushed for a naval blockade of Iran back in March. In today’s post, I set the record straight on the scale of economic collapse in Iran and what further steps the US can take to speed things along. This week’s raft of measures from the US Treasury is an important step in the right direction. There’s much hand-wringing over China’s role, but - now that the UAE has suspended all trade with Iran - Turkey is the main country that should be in the crosshairs.

The goal of the US blockade is to collapse Iran’s export revenues, which fuel the rest of the economy. As the chart above shows, that’s clearly happening. Iran’s currency - the Rial - falls sharply whenever the blockade hits, including after its start on April 13 and its re-imposition July 14. Official Iranian data are highly questionable, since they will tend to understate the collapse of the economy. But - bearing that in mind - what data there are look pretty shocking. The left chart below shows that unemployment is spiking, especially among Iran’s massive young population, and severe shortages are tipping the country into hyperinflation as the right chart below shows.

More can be done to accelerate Iran’s economic collapse. This week’s US sanctions package is a step in the right direction. The left chart below shows monthly data for Iran’s goods imports through April 2026. The pie chart on the right highlights who the country imported from most heavily last year. Prior to the war, the UAE were the single biggest trading partner (blue), followed by China (red), Turkey (orange) and the EU (purple). The imposition of the blockade shifted who Iran is able to import from, which is what I look at next.

The pie chart on the left below updates from whom Iran imported goods in March and April 2026. The UAE grew even more important, which is nuts, but the US shut this down a few weeks ago. There’s lots of talk how important China is to the latest round of US sanctions, but Turkey - with its land border - is more important at this stage. Indeed, as the chart on the right below shows, exports from Turkey exploded through June, a predictable response to the naval blockade, which shut down Iran’s ports. If this week’s sanctions package shuts down Turkey as a trading hub - together with the UAE having stopped all trade - this will drastically increase Iran’s isolation and make a bad situation worse very quickly.

The drumbeat of negativity on the blockade and sanctions more broadly isn’t well informed. The economic picture in Iran is deteriorating rapidly and the US has easy ways to drastically ramp up Iran’s economic isolation. No regime stays in power for ever and Iran’s won’t either. It’s on much shakier ground than most people think.

Headlines are coming fast and furious on potential plans by the US Treasury to keep long-term yields from rising. One such story - by Steve Liesman at CNBC - popped up yesterday saying that the Treasury General Account (TGA) may be used for buybacks. That’s a twist from last week’s announcement, where the presumption had been that buybacks of longer-dated debt would be financed by issuing short-term debt. This is different because it would involve outright purchases of bonds and a commensurate injection of liquidity into the economy. Another story is the tweet below by Charles Gasparino of Fox news, claiming Treasury will put the “fear of God” into bond market vigilantes who’re trying to drive the 10-year yield higher.

There’s a lot going on with all these headlines, so let me break things down into a few bite-size chunks for easier consumption.

• These stories amount to verbal intervention. No official announcement was made yesterday by Treasury regarding US debt management, so these stories - at this point - amount to “verbal intervention,” i.e. they’re an attempt to scare markets from driving long-term yields up. Over the weekend, I did a post and a live stream on games high-debt countries play as they run out of fiscal space, including trying to scare markets and calling them irrational. In my opinion, this is almost always counterproductive because it showcases a vulnerability. Once you start drawing lines in the sand with markets, they’re invariably going to test you. So this all but guarantees that long-term yields will resume their rise.

• All this is tilting at windmills: as the black line above shows, the TGA currently stands around $1 trillion. If the government prefunds itself, i.e. issues lots of debt ahead of any actual spending as during the early stages of COVID, the TGA will rise and that cash can then be run down, including by buying back outstanding debt. All this is very well and good, but it misses the point. The TGA is finite, so it’ll only go so far. The ever-expanding deficit means debt issuance is continually growing, as the chart below shows, so using the TGA is confronting a “flow” problem with a “stock” measure. That never works. Flows always win that fight.

• The vigilantes are unimpressed. The chart below shows the US yield curve. The black line is the midpoint of the Fed’s 25 basis point target range for the policy rate. The blue line is what markets price for this rate by the end of the year. The orange line is the 10-year Treasury yield, while the red line is the 30-year yield. Since last Wednesday’s buyback announcement, 10-year is down one basis point and 30-year is down six basis points, i.e. the impact on long-term yields is tiny.

• The debasement trade is loving this. The more high-debt countries blunder into artificial yield caps, which is where the US is heading, the more markets seek safe havens from debt monetization. The lesson from Japan is that artificial yield caps are currency negative and can spark a devaluation spiral that’s hard to get out of. The Dollar has fallen sharply since last week’s buyback announcement and gold is now up over seven percent (see chart below). Markets know exactly what game is being played and are happy to jump on the debasement trade.

The direction of travel is clear. Debt levels across much of the advanced world will keep rising because reigning in out-of-control deficits is politically costly and policy makers have little incentive to do so. As a result, markets will keep pushing long-term yields higher and governments will increasingly resort to artificial yield caps to avoid the appearance of fiscal distress. Of course, such yield caps are already a reality on the Euro periphery as well as Japan. Last week’s buyback announcement by the Treasury means this is also - unsurprisingly - the direction of travel in the US. Over time, we’ll get more caps in more places with ever greater intensity.

The fly in the ointment is that markets still have a voice. They’ll be looking for safe havens where they can ride out this debt bonanza and there’s a few. The first is gold and other precious metals, which rose sharply last week. The second is currencies of low-debt countries in the G10, including Switzerland, Sweden and Norway. The third is emerging markets (EM), which should see a “wall of money” coming their way. This is because artificial yield caps in the G10 subsidize the carry trade, wherein investors borrow in low yield currencies and invest in high yield ones. The biggest risk to carry trades is that the cost of funding - where you borrow - spikes. If the G10 increasingly resort to yield caps, that risk diminishes and so it makes perfect sense that the Dollar fell to a new low against EM after last week’s Treasury’s buyback announcement, as the blue line in the chart below shows.

With the Dollar down to a new low versus EM, it’s tempting to think this move is done and better not chase it. The opposite is the case, thanks to the war with Iran that’s generated massive outflows from EM in recent months. The chart below shows a centered three-month moving average for daily flows to EM from the WFII screen in Bloomberg. The black line shows total non-resident flows to EM, the red bars show flows into EM bonds and the blue bars show flows into EM equities. The spike in oil prices and all the associated uncertainty caused outflows almost on par with COVID in 2020, which means that - at this juncture - the EM carry trade is still heavily under-positioned. The fall in the Dollar against EM is only just getting started.

Running out of fiscal space isn’t fun. It means difficult decisions have to be made to bring a country’s public finances under control and get debt down. In theory, this isn’t complicated. You can raise taxes, cut spending or sell government assets and use the proceeds to pay down debt. The problem is that - in practice - none of these things are easy or popular, so governments have a massive incentive to kick the can down the road and pretend like everything’s fine. All this is a bit like the “five stages of grief,” which start with “denial” and end with “acceptance.” Except that - when it comes to fiscal policy - in most cases “denial” lasts until there’s a crisis.

All this is deeply irresponsible. At its most basic level, this is an intergenerational issue because - if we keep racking up debt - future generations will have to pay it off. So we’re literally living beyond our means at the expense of those who have no say in the matter. When governments do things to obfuscate on all this, that’s deeply wrong and needs to be called out. Japan’s caps on long-term government bond yields and its interventions to stop the Yen from falling are precisely this kind of obfuscation. Their purpose is to perpetuate a broken status quo and delay needed adjustment. In Europe, whenever the ECB calls rising yields “fragmentation” and a threat to monetary policy transmission, it’s the same thing. What the ECB is really saying with this stuff is that markets are irrational and it knows best where the yields of highly indebted countries should be. That’s an absurd claim and deeply dishonest. Which brings us to Treasury Secretary Bessent who announced bigger buybacks of longer-dated debt - an effort to artificially cap yields - and said rising yields don’t reflect fundamentals. In one swoop, the US managed to emulate Japan and the Euro zone. Just not in a good way.

When countries run out of fiscal space, they start playing games to obfuscate and distract. This involves shortening the maturity of their debt issuance, leaning on their central banks to cap yields and speaking dismissively about “irrational” markets. None of this is about one particular administration or government. It’s much more systemic and is basically about powerful vested interests fighting to stay in charge. That’s how Germany keeps turning a blind eye to the ECB operating far outside its mandate, how Japan blunders from one intervention to the next and how the US deficit is equally out of control under Republicans and Democrats. This is much more systemic than one political party or another.

Today’s post looks at the games countries play as they run our of fiscal space. I’ll start with shortening the maturity of debt issuance, then I’ll talk about governments using their central banks to cap yields and I’ll round things out with all the dismissive talk of “irrational” markets. None of this is new. We’ve seen it all before. The only thing that’s certain is that all this stuff means one thing: the clock is ticking down on a building global debt crisis.

• Shorten the maturity of debt issuance: the charts above show total net new issuance of debt broken down into short- (red) and long-term (blue) debt for the US (top left), Canada (top middle), Japan (top right), the Euro zone (bottom left), the UK (bottom middle) and Sweden (bottom right). Countries often shift debt issuance to the short end of the curve during shocks. That explains the spikes in the red bars during the global financial crisis and COVID. But the red bars are increasingly common in recent years, when there’s no crisis in sight and debt issuance is running way above its pre-COVID norm. That’s par for the course when countries run out of fiscal space because markets demand higher risk premia and steepen the yield curve. Rather than do what’s right, i.e. fix broken fiscal policy, governments shorten the maturity of debt issuance in an effort to buy time. That obviously isn’t something you can do indefinitely. At some point, you’ll be issuing all your debt at the short end of the curve, so this way of gaming things has been exhausted. I show Sweden as an example of a country where fiscal policy isn’t broken. Sweden actually balances its budget over time and debt stands at 37 percent of GDP. There’s still countries that run good fiscal policy, which is why they’re now part of the “debasement trade.”

• Lean on your central bank: the chart above shows holdings of government debt by the world’s major central banks. When QE first got started during the global financial crisis, it was intended as an extension of normal monetary policy when policy rates couldn’t be cut any further, i.e. it was intended as a countercyclical tool that would be unwound once the economy recovered. That unwinding never happened. Central banks have become a permanent repository for government debt, which is a form of financial repression and is why “shadow yields” are so much higher than actual yields all over the place.

• Dismiss markets as irrational: Treasury Secretary Bessent is an understudy to the ECB in this regard, given that the ECB calls rising yields for high-debt countries “fragmentation,” which is just a fancy way of saying markets are irrational and it knows better. At the ECB, Isabel Schnabel is the main proponent of all this. In June 2022, just as global yields and periphery spreads (see the chart above) were rising in the post-COVID inflation scare, she gave a speech on “fragmentation” that laid the groundwork for a new tool (TPI) allowing the ECB to cap yields on a permanent basis when it deems those disconnect from fundamentals. There’s so much that’s wrong with this and - needless to say - it’s way more wrong for a central banker to be saying this than for a finance minister like Scott Bessent.

As governments run out of fiscal space, they start playing all kinds of games to kick the can just a little bit further down the road. This stuff is dishonest and harmful. The reason it’s happening in greater frequency all over the place is because we’re in the early stages of a global debt crisis. So it’s no surprise that gold and other precious metals are taking off, including after this week’s buyback announcement. Things are going to get worse before they get better.

This week’s buyback announcement by the US Treasury is tiny in the big picture. It implies $14 billion in additional purchases on top of what was already scheduled for ten to thirty year Treasuries. Seen against the mountain of government debt held by the public - a stunning $32 trillion - this is peanuts and hardly worth fussing over.

So why did markets have such a violent reaction? The chart above shows the price of gold since January 2024. The vertical red lines are key events: (i) the November 5, 2024, election that got President Trump elected; (ii) the rollout of reciprocal tariffs on April 2, 2025; (iii) the dovish keynote by Chair Powell at last year’s Jackson Hole on August 22, 2025; (iv) the start of the war with Iran in the night of February 27, 2026; and (v) the most recent Fed meeting on July 29, 2026, which earned Chair Warsh lots of criticism. Gold is up over six percent since Wednesday’s buyback announcement, which is a big move. The chart below shows that the Dollar tumbled against the G10 (blue line) and emerging markets (black line). In fact, the Dollar versus emerging markets (EM) is in my opinion the best leading indicator for where things are headed and this index just fell below its pre-war low, which points to more Dollar weakness ahead. Markets definitely don’t think this week’s buybacks are small fry.

The reason markets are having such a violent reaction is because they’re extremely attuned to the risk that high-debt governments start fiddling with interest rates. I’ve written a series of pieces on how artificial yield caps in Japan are the reason the Yen is in a deprecation spiral for over five years. After all, if investors don’t get paid adequate risk premia, why would they hold your government bonds. Instead, they’ll head for the exit, putting depreciation pressure on the currency. Markets have closely watched and learned from Japan. They’re on the lookout for signs of anything similar happening elsewhere. This week’s buyback announcement - as long-term Treasury yields were making multi-decade highs - therefore understandably got a big reaction.

Treasury Secretary Bessent now has a problem. If you give markets a target, they’re going to start shooting at it. As the chart above shows, repeated interventions to lift the Yen were counterproductive because they encouraged markets to “test” - over and over - if officials would stand by their commitment to defend the Yen. The end result has been that interventions are happening with increasing frequency, their efficacy is falling over time and - most importantly - the Yen has continued its weakening trend. So it will now be with long-term Treasury yields. Markets will “test” Bessent over and over. The Treasury will have to do things to cap yields with increasing frequency and - every time it does that - gold will rally and the Dollar will tumble. The US is backing itself into a corner, from which the only way out is genuine fiscal adjustment.

The debasement trade is powered by the fear that fiscal policy across many advanced economies is out of control. Markets fear that governments will be tempted to inflate away unsustainable debt burdens, which drove last year’s crazy rise in precious metals that are seen as safe havens. Even before this week’s events, I’d been flagging that the signs for this rally to resume were mounting, which I’d outlined here and discussed in my live stream two weeks ago. The US Treasury’s efforts to play with debt issuance to cap long-term yields adds fuel to this fire, because - as I noted yesterday - it signals an unwillingness to do what’s really needed (reign in the deficit) and instead resorts to financial engineering to cap yields. Markets take a dim view of this and so it’s no surprise that precious metals are up sharply since the buyback announcement.

The chart above shows the debasement trade in broader context. It indexes various assets to be 100 on August 21, 2025, the day before then Chair Powell gave his dovish keynote at last year’s Jackson Hole, which is the catalyst that started this trade a year ago. Shown are the S&P 500 (red), gold (black), silver (purple), bitcoin (orange), the Dollar against the G10 (blue) and the front-month futures price for Brent (pink).

Three points are worth making. First, during the first phase of the debasement trade - from Aug. 22, 2025, to the start of the war with Iran in the night of Feb. 27, 2026 - the Dollar was flat as precious metals prices went crazy. This means that the debasement trade at the time wasn’t about the Dollar, but about debasement fears for much of the G10. That’s changing. The Dollar is tumbling after Treasury’s buyback announcement and rightly so. This phase of the trade will see much more Dollar weakness. Second, since the start of the war with Iran, gold and silver fell whenever oil prices and risk aversion spiked, the opposite of what safe haven assets should do. I put this down to lots of retail investors getting sucked into the debasement trade last year, which - as they’re more skittish than traditional holders - made gold and silver trade like high-beta assets. That’s over as I flagged two weeks ago. Gold and silver are up even as oil is rising. Third, unlike the first run of the debasement trade, when bitcoin did terribly, it’s now doing better. I’d stay well clear of bitcoin. Markets don’t see it in the same light as gold and silver. It definitely isn’t a safe haven.

The chart above zeros in on precious metals. Since the buyback announcement, silver (red) is up a stunning eight percent, gold (black) four percent, platinum (orange) seven percent and palladium (pink) three percent. Silver was the “bad boy” of the debasement trade during its initial phase, rising more than anyone else. That’s playing out again, which I see as a signal that this trade is truly back.

At its peak, the debasement trade wasn’t just about precious metals. Currencies of low-debt countries like Sweden (SEK) or Switzerland (CHF) were also rising, as the chart above shows. This is just getting started again and will be even more forceful this time around because of the downward pressure the Treasury buyback news puts on the Dollar. This round of the debasement trade is thus very much about Dollar weakness, which I flagged in yesterday’s post.

Yesterday’s surprise announcement by the US Treasury that it’s increasing buybacks of longer-dated bonds sent two clear signals. The first is that the recent rise in long-term yields - which had risen to their highest level in over twenty years - was crossing an important pain threshold for the US. The problem with this kind of action is that you show your hand, which is what’s now happened. The second and by far the more important signal is that there’s zero willingness to confront the underlying problem, which is that fiscal policy is running out of control and there’s an urgent need to reign in the deficit. Instead, yesterday’s announcement is a form of financial engineering that papers over mounting stress in the Treasury market.

Indeed, yesterday is the clearest sign yet that the US is following Japan on its path towards currency debasement. When fiscal policy is out of control, governments can obviously do many things to cap yields, but this just puts depreciation pressure on the currency because markets don’t get paid the kind of risk premium they desire. What would be a debt crisis thus morphs into a currency crisis, which is why the Yen has been falling for so many years.

Markets have completely internalized this. Following yesterday’s news, the Dollar fell sharply and is down to its lowest level versus emerging markets (EM) this year, in line with my prediction for Dollar weakness in 2026. The “debasement trade” has also been making a comeback since the Fed meeting on July 29. Gold and other precious metals saw big gains yesterday. What this price action means is that markets are primed for debasement, which is what yesterday’s announcement boils down to. The US Treasury is playing with fire. As Japan shows, once you go down this road, it can be hard - if not impossible - to stop your currency from falling.

The key question is whether the Treasury got good bang for the buck yesterday. I’m not sure it did. The chart above shows the US yield curve. The black line is the 2-year yield, the blue line is the 10-year yield and the pink line is the 10y10y forward yield, which is what’s been pushing higher recently. This thing fell, but the drop isn’t going to impress anyone. The upward trend in long-term yields is clearly still in place.

Meanwhile, as the chart above shows, the Dollar absolutely cratered against the G10 (blue line) and EM (black line). Furthermore, as the chart below shows, gold jumped yesterday, as did other precious metals. Markets are primed for Dollar debasement to resume and - as Japan shows - it can be next to impossible to stabilize a currency once it enters a devaluation spiral. The US is playing with fire with this buyback.

I’ve been writing about the rise in long-term government bond yields since this time last year. The sell-off that’s engulfed global bond markets recently therefore isn’t new. This has been going on - in fits and starts - for over a year, with flareups happening at different points across the many highly indebted countries around the world. Today’s post builds on my live stream from Sunday and does a Q&A on what’s happening, why it’s happening, what it means and whether or not this is a big deal.

• What’s happening? The chart above shows the yield curve for the US. At the very short end of the curve are the Fed’s policy rate (black line) and what markets price for this rate by the end of the year (blue line). At the long end of the curve are 10- (orange line) and 30-year (red line) Treasury yields, where it’s especially the latter that’s been rising lately. What’s notable about this rise is that it’s happening even as expectations for the Fed are moving in a dovish direction. This means the rise in longer-term yields is about markets pushing up risk premia, which may reflect a growing concern that fiscal policy and debt are out of control. The chart below decomposes the 30-year Treasury yield (red line) into break-even inflation (blue line) and the real rate (black line). Break-even inflation is stable, so whatever risk premium is getting put into long-end yields does not yet reflect inflation fears.

• Where is this happening? The chart below shows 30-year yields for the US (red), Germany (blue), Japan (black), the UK (orange), Italy (pink) and France (green). The latest rise in yields is global, repeating the pattern we’ve seen in past yield spikes over the past year. That shouldn’t come as a surprise. Government debt has risen to alarming levels across many advanced economies and budget deficits are much too wide in most places given that this is a non-crisis period.

• Why is this happening? The chart below shows the slope of the US yield curve, i.e. the difference between the 30- and the 2-year Treasury yield. The vertical red lines denote key turning points for markets over the past couple of years, which is the rollout of reciprocal tariffs on April 2, 2025, the dovish keynote by then Chair Powell on August 22, 2025, the start of the war with Iran in the night of February 27, 2026, and the most recent Fed meeting on July 29, 2026. It’s clear that the Fed is a major catalyst in the recent spike in long-term yields, much as was the case after last year’s Jackson Hole. This suggests markets are uneasy with a Fed that’s easing or on hold, likely because they see this as increased subservience to the White House. The recent rise in oil prices may be playing an additional role.

• What does all this mean? This sell-off has evolved in two stages. The first came in the days immediately after the July 29 Fed meeting, which caused long-term Treasury yields in the US to rise. This is the blue bars in the chart below, which capture the rise in 10y10y forward yields from July 28 to August 7. The second stage began thereafter and saw what started out as a US-specific shock spread to other advanced economies (red bars). During this stage, as I note yesterday, high-debt countries have been hit hardest, so markets are sending a clear message that they’re running out of patience with reckless fiscal policy. So, even if the Fed is the immediate catalyst for what’s unfolding, the underlying issue is bad policy that’s left many countries vulnerable to any old shock that comes along.

• How worrying is all this? The underlying issue here - as I note above - is bad fiscal policy and governments that are increasingly leaning on central banks to artificially cap yields. Take Japan, where the 30-year yield is currently just above four percent. As the chart below shows, this yield - given the cross-country link between debt and yields - should really be around seven percent, so yields have a lot further to rise. The question, of course, is whether governments will allow this to happen and the obvious answer is that they won’t. The BoJ has no choice but to keep buying bonds so that yields don’t start rising uncontrollably. The ECB is in a similar predicament regarding high-debt countries on the Euro periphery. Yields thus can’t explode higher, but instead will keep grinding higher the way they have been. The underlying situation - one of fiscal and political dysfunction - is very worrying on a global scale.